FPIs Flock to Indian Debt Market Amid Equity Outflows

Debt Inflows Cross ₹40,000 Crore in March Alone

Foreign portfolio investors (FPIs) are increasingly shifting their focus toward Indian debt markets, pouring in ₹40,000 crore in March 2025 alone, according to NSDL data. While equity investments continue to see outflows—amounting to ₹20,250 crore in March—the bond market has gained traction due to India’s inclusion in the JP Morgan Bond Index, expectations of rate cuts, and a strong macroeconomic outlook.

This significant rise in FPI debt investments underscores a changing investment landscape, where global investors are seeking stability in Indian fixed-income assets despite volatility in equity markets.

Rupee Stability Supported by Debt Inflows

Fluctuating Currency, Stable Debt Demand

The Indian rupee has remained volatile in 2025, depreciating to 87.79 per US dollar in February before recovering to 85.69 by March 25. While debt inflows do not directly dictate currency movement, experts suggest that they provide stability by ensuring sustained capital inflows.

“FPI inflows into bonds play a stabilizing role for the rupee, especially in times of equity outflows,” said an analyst from a leading investment firm.

India’s JP Morgan Bond Index Inclusion Drives Passive FPI Inflows

Index-Based Investments Boost Market Liquidity

One of the primary drivers of FPI interest in Indian debt is the country’s inclusion in the JP Morgan Bond Index, which has encouraged passive investments from global funds tracking the index.

“Initially, FPIs started buying after India’s inclusion in the index, but inflows slowed due to rising US Treasury yields. Now, with expectations of inclusion in the FTSE Russell Index by September 2025, flows are expected to accelerate again,” said Shantanu Godambe, Fund Manager (Fixed Income) at DSP Mutual Fund.

When US bond yields rise, investors often reallocate funds from emerging markets like India back to the US. However, the resurgence of inflows into Indian debt signals renewed confidence in the country’s fixed-income market and economic trajectory.

FPI Inflows in Debt Outpace Equities Over Five Years

Debt Becomes a Stronger Component of FPI Portfolios

Over the past five fiscal years, FPIs have invested $54 billion in India, with $33 billion directed toward debt markets and $21 billion into equities.

“Higher FPI debt flows, fueled by India’s inclusion in global bond indices, have enhanced the country’s investment portfolio mix. This trend is beneficial for a growing economy like India,” said SEBI Whole-Time Member Ananth Narayan at an ARIA (Association of Registered Investment Advisers) event.

As of March 25, 2025, year-to-date FPI inflows into Indian debt markets stood at ₹50,927 crore, while equity outflows amounted to ₹1.3 lakh crore.

Upcoming RBI Rate Decisions Key to Future Bond Flows

Monetary Policy Expectations Driving Investment Trends

With the Reserve Bank of India’s (RBI) policy review approaching, bond market participants are anticipating a rate cut, which could further boost FPI inflows.

“A 25-basis-point rate cut, coupled with a shift in RBI’s stance, could enhance FPI flows into debt, as lower interest rates make bond investments more attractive,” said Godambe.

Global interest rate movements are also influencing investor behavior. Some investors are increasing their Indian debt exposure, while others are maintaining a balanced approach between equity and fixed-income investments.

Macroeconomic Strength Enhances India’s Debt Market Appeal

Political Stability, Fiscal Consolidation, and Controlled Inflation

India’s political stability, disciplined fiscal policies, and controlled inflation have significantly increased investor confidence in the debt market.

“Over the past decade, India has stabilized inflation better than major economies, reduced fiscal deficits, and maintained a strong economic growth trajectory. The fiscal deficit is projected to decline to 4.4% of GDP in FY2026, down from 6.7% in FY2022,” said Piyush Baranwal, Senior Fund Manager at WhiteOak AMC.

Baranwal also highlighted that India’s sovereign credit rating does not fully reflect its economic strength, and a potential credit rating upgrade could further increase FPI interest in Indian bonds.

Government Securities (G-Secs) Dominate FPI Investments

Corporate Bonds See Subdued Interest

While government securities (G-Secs) have attracted ₹1,17,000 crore in FY25, corporate bond flows have remained relatively subdued at ₹7,400 crore.

“FPIs prefer government securities due to their inclusion in global bond indices, whereas corporate bonds remain outside these indices,” explained Godambe.

Despite this, top-rated corporate bonds have continued to see demand, particularly as investors position themselves ahead of potential rate cuts.

Low US-India Yield Spreads Do Not Deter FPI Debt Inflows

Fiscal Strength and Inflation Control Keep India Attractive

Historically, lower yield spreads between Indian and US 10-year bonds would reduce FPI inflows into India. However, this trend has not played out as expected in 2025.

“India’s 10-year bond yield is currently at 6.65%, while US Treasuries yield 4.35%, creating a 230-basis-point spread. While lower than historical levels, India’s improving fiscal deficit, lower inflation, and economic resilience make its bonds attractive,” said Baranwal.

In contrast, the US deficit remains high at 6.5%, and concerns over stagflation risks in the US economy have prompted many investors to diversify into emerging market bonds like India’s.

FPI Debt Inflows Complement, Not Replace, Equity Investments

Portfolio Diversification Over Structural Shift

While debt inflows have surged, experts caution against interpreting this as a broad shift away from equities.

“Some FPIs are investing in debt due to expectations of rate cuts, but this does not signal an abandonment of equities. Instead, it reflects a strategy to balance portfolios,” said an analyst from a global asset management firm.

Global macroeconomic conditions, including recent US policy changes and uncertainty in Europe and China, have influenced investment diversification. The weakening dollar and lower US interest rates have encouraged funds to increase allocations to India, Hong Kong, and Germany.

While Indian equities remain a long-term favorite, the current momentum in debt investments is driven by short-to-medium-term factors, such as rate cut expectations, index inclusions, and a stable macroeconomic outlook.